Download The Future of the New Zealand Economy – Where are we

The Future of the New Zealand
Economy – Where are we heading?
Brent Layton
EMA’s CEO Network Breakfast
9 May 2006
Short-term
• Real Gross Domestic Product (GDP) has not grown
over the 9 months to March 2006.
• Real GDP is currently forecast by NZIER to grow by
0.7% in the year to March 2007 and by about 2.0% in
the year to March 2008.
• On a per capita basis the picture is even worse.
• Business profits have tumbled and according to
NZIER’s QSBO they are expected to tumble further
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Short-term (2)
• Investment is slowing and QSBO’s investment
intentions measure indicates it will slow further. The
investment in the residential sector will decline
sharply.
• QSBO’s difficulty of finding labour measure has
eased very quickly and firms on balance expect to
make further staff reductions.
• QSBO’s capacity utilization measure has been falling
for eighteen months.
• The Reserve Bank (RB) still thinks NZ has an
inflation problem .
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Short-term (3)
• In its March MPS, the RB threatened to hold interest
rates at current levels until next year.
• It repeated the threat when making its April OCR
announcement.
• What is spooking the RB into its inflation fears are:
– Oil prices. Judging by futures they will go a fair bit higher.
– Depreciation of the NZ$.
– Current inflation at 3.3% being outside the 1-3% band and
in the short-term could go higher.
– Low unemployment, wage settlements and gravity defying
house prices and resilient consumption activity.
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Medium-term
• Scenario 1: RB accepts NZIER (and Westpac’s) view
of the economy’s state and prospects and adopts a
more medium term forward looking focus.
• RB will cut rates now:
–
–
–
–
NZ$ will weaken again
Exports will continue to lift
Inflation will go slightly higher
Economy will start export led recovery in 2007 calendar
year
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Medium-term (2)
• Scenario 2: RB sticks with its current perspective and
stated intentions:
• RB will cut rates sometime next year:
–
–
–
–
The NZ$ will hold up longer
Export increase will be subdued and even slower
Economic activity will continue to slow in 2006 and 2007
The shallow and short recession will turn into something
deeper and longer
– The economy will not start to recover until 2008 or later
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Longer-term
• If current policies in NZ are maintained Australia will
grow strongly relative to NZ in terms of real GDP and
particularly in terms of real GDP per capita :
–
–
–
–
Energy and minerals demand from China and India
Fewer infrastructure problems – roads, rail, ports, energy
Closer to new locus of world economy
Economies of scale – 5 x the population and 7 x the
economy
– Lower cost of capital due to lower sovereign risk in
PTMRP
– FTA with the United States
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Longer-term (2)
• This is despite some obvious relative drawbacks for
Australia when compared with NZ in terms of:
– Labour relations rules (although Australia is changing)
– Over-regulation of a number of sectors including the
important finance and banking and energy sectors
– Excessive governance costs due to the Federal nature of the
state and bi-cameral parliaments
– Higher security and defense risks and costs because of its
location and foreign policy stances
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Longer-term (3)
• The consequences of Australia’s relative performance
will be:
– The income differentials between NZ and Australia will
widen further
– ‘Top skimming’ of talent and skills from NZ will accelerate
– Relocation of business decisions and higher income jobs to
Australia will continue
• New Zealand won’t just be vulnerable to these from
Australia, but Australia is the closest and most
significant competitor
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Are there options for NZ?
• We can’t create mineral and energy resources we do
not have, but we can allow those we have to be
exploited
• We can solve our infrastructure problems which are
largely confined to roads and energy very easily:
–
–
–
–
Implement Jim McLay’s 1997 RAG Report for roading
Privatise the SOE generators
Remove the self-imposed impediments on the use of coal
Reform the RMA so the right balance between
infrastructural needs, the environment and NIMBY is found
quicker
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Are there options for NZ? (2)
• We can’t change New Zealand’s geographic location
and relative size, although we can adopt approaches
that minimise the handicaps:
– A further round of port reform requiring the removal of
local government involvement which has been an inhibitor
to rationalisation and, in some cases, to further labour
reform
– Retain a competitive transport system
• Whenuapai, a lost opportunity?
• Encourage competition in air transport
• Encourage competition in sea transport (repeal Commerce Act
exemption)
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Are there options for NZ? (3)
• We can adopt policies that will over time lower our cost of
capital:
– Encourage domestic savings in an efficient manner and investment in
businesses and assets other than housing (KiwiSaver and Govt super
fund are not efficient)
– Avoid policies that expropriate shareholder wealth e.g. Telecom and
local loop unbundling
– Merge the NZ and Australian capital markets?
• We can improve our chances of better trade deals with the
United States and continue to promote access to other markets.
On the US front we are very likely to have to deal with the
‘sacred cow’ of nuclear propulsion.
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Are there options for NZ? (4)
• We can also avoid falling into Australia’s weaknesses
of over-regulation and excessive governance and
adopting foreign policies that exacerbate security
risks.
• These options at best will just slow the pace at which
NZ loses ground relative to Australia ( and
elsewhere).
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Is there a winning game plan?
• Is there a game plan that will allow NZ to hold its
own or better still one that will allow it to catch up?
• Possibilities are to focus on:
– Design of high-end quality products
– Tourism – improve yield
– Education – improve yield and develop more secure
reputation
– Health – develop the export sector?
• But picking winners is not smart. Removing barriers
to businesses creating wealth should be the focus of
policy.
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Economic growth
Percent change
7.0
Seasonally adjusted, quarterly
6.0
Forecast
Actual, annual average
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
1994
Source:
1996
1998
2000
2002
2004
2006
2008
2010
Statistics New Zealand, NZIER forecasts
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Profitability
Net percent of firms reported higher profit in the past
three months (LHS), annual percent change (RHS)
Net percent of firms
15.0
30
3.00
10.0
2.00
20
5.0
1.00
10
0.0
0.00
-5.0
0
-10.0
-10
-1.00
-15.0
-20
Past 3 months
-20.0
Next 3 months
-25.0
-2.00
Profitability (LHS)
-3.00
Output minus input price change (RHS)
-30
-4.00
-30.0
-40
96.1
97.1
98.1
99.1
00.1
01.1
02.1
03.1
Source: NZIER Quarterly Survey of Business Opinion
04.1
05.1
06.1
-35.0
Mar-00
-5.00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Source: Statistics New Zealand, NZIER Quarterly Survey of Business
Opinion
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Investment intentions
Net percent of firms, next 12 months
20
15
Buildings
Plant & machinery
10
5
0
-5
-10
-15
-20
-25
-30
-35
1995
Source:
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
NZIER Quarterly Survey of Business Opinion
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Residential investment
Annual, dollar millions, 1995/96 prices
8,000
7,000
Real Residential Investment
Historical average Real Residential Investment
6,000
5,000
Forecast
4,000
3,000
1988
Source:
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Statistics New Zealand, NZIER forecasts
18
Non-residential building and other
construction
Annual, dollar millions, 1995/96 prices
5,000
4,500
4,000
Non-Residential Buildings
Other Construction
3,500
3,000
Forecast
2,500
2,000
1,500
1,000
1996
Source:
1998
2000
2002
2004
2006
2008
2010
Statistics New Zealand, NZIER forecasts
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Difficulty of finding labour
Annual average percent change (LHS): net percent of firms (RHS)
6.0
-120
Nominal private sector wage (LHS)
-100
5.0
Difficulty finding skilled labour, 2 years earlier (RHS)
Forecast
-80
4.0
-60
-40
3.0
-20
2.0
0
20
1.0
40
0.0
1992
Source:
1994
1996
1998
2000
2002
2004
2006
2008
60
2010
Statistics New Zealand, NZIER forecasts, NZIER Quarterly Survey of Business Opinion
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Capacity utilisation
0.94
0.92
0.90
0.88
0.86
0.84
0.82
96.1
Source:
97.1
98.1
99.1
00.1
01.1
02.1
03.1
04.1
05.1
06.1
NZIER Quarterly Survey of Business Opinion
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Consumer price inflation
Annual percent change
4.5
Forecast
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2000
2001
Source:
2002
2003
2004
2005
2006
2007
2008
2009
2010
Reserve Bank of New Zealand, NZIER forecasts
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Exports
Annual average percent change
25
Goods exports
Forecast
20
Services exports
15
10
5
0
-5
-10
1992
Source:
1994
1996
1998
2000
2002
2004
2006
2008
2010
Statistics New Zealand, NZIER forecasts
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